A Free-Market Energy Blog

Beware EPA ‘Social Cost of Carbon’ Models

By Shawn Ritenour -- February 14, 2018

“Wouldn’t it be nice if we could scientifically determine the cumulative costs or benefits that result over the next three hundred years from our choices in the present? It may be nice, but it is impossible. ”

“Because [mainstream climate] models produced such wildly different results depending on the projections and assumptions baked in the mathematical cake, economist Robert Pindyck concluded after an extensive review of such models that they are so badly flawed as to make them virtually useless for policy.”

When former President Obama wanted to curtail carbon dioxide emissions, he instructed his economic advisors to construct a way to calculate their effect on society. The metric adopted by the EPA to guide them in their quest to regulate the economy is a metric called the “social cost of carbon” (SCC).

What is CO2?

Right at the start we should note an important distinction. Carbon is an element; carbon dioxide a compound. Carbon is a solid; carbon dioxide a gas. Carbon—in the form, e.g., of fly ash, dust, fine particulate matter, can harm health; carbon dioxide is harmless except at very high concentrations (above 10,000 parts per million—versus ordinary atmospheric concentration of 400 ppm) and even then only after long, uninterrupted exposure.

Unlike carbon, carbon dioxide is odorless, colorless, and, except under conditions just described, nontoxic—indeed, indispensable to photosynthesis and so to all life. “Carbon” makes people think of black soot, smoke, smoggy skies; “carbon dioxide” doesn’t.

That’s why proponents of reducing carbon dioxide emissions call them carbon emissions instead. The term is deceptive and plays on ignorance and fear.

The Nitty Gritty

The EPA uses three models to estimate the SCC: Climate Framework for Uncertainty, Negotiation and Distribution (FUND), Dynamic Integrated Climate-Economy (DICE), and Policy Analysis of the Greenhouse Effect. Together such models are called integrated assessment models. While such attempts seem laudable, the models are nevertheless unhelpful at best and destructive at worst. All incorporate similar, grave weaknesses in how they attempt to calculate the SCC.

All include a host of assumptions and projections that are necessarily more ad hoc than based on empirical reality. In order to come up with a single numerical estimate of the social cost of emitting a metric ton of carbon dioxide, the models use

  • projections of future emissions (which also requires projections of both future GDP growth and the amount of carbon dioxide emitted per dollar of GDP);
  • future atmospheric carbon dioxide resulting from past, present, and future emissions;
  • average global temperature changes resulting from higher carbon dioxide concentrations; and the economic impact, in terms of lost GDP and consumption, of higher global temperatures.

They also include estimates of the cost of reducing carbon emissions and assumptions about the rate of social time preference by which future money is discounted. That is a lot of projecting and guesstimating.

Assumptions, Assumptions

Understanding all of the assumptions and projections that go into these models helps one to understand why the results are so iffy as to be of no real help at all for policy makers. Case in point: in 2015 the EPA used one of its models to estimate that the SCC was $37 per metric ton.

That same year another study published in Nature Climate Change estimated the cost at $220 a ton. That is a difference of almost six times! What gives? It turns out that these models are highly sensitive to the values of the parameters representing the projected effects of the variables mentioned above.

For example, Kevin Dayaratna, a Ph.D. statistician, and David Kreutzer, a Ph.D. economist, have co-authored a series of studies showing that using different rates of just one of the variables—social time preference—has significant effects on the resulting estimates of the SCC generated by the DICE model. Holding other variables constant, a discount rate of 2.5% yields a social cost of a carbon of $87.69 while a discount rate of 7% yields a cost of $12.25.

They also noted that using more up-to-date estimates of how sensitive climate temperature is to carbon dioxide reduced the estimate of the SCC by anywhere from 32 to 42 percent, depending on the magnitude of the discount rate used. And they showed that the FUND model is likewise very sensitive to small changes to model parameters. In fact, it even allows for large probabilities that the SCC could be negative, i.e., that increases in carbon dioxide emission could result in net benefit for society.

Positive Side of CO2

Potential positive effects of increased carbon dioxide emissions are often dismissed out of hand. Yet recent scientific literature indicates this might actually be the case. A 2016 study published in Nature Climate Change documents that a large part of the Earth’s land featuring vegetation has benefitted from significant greening over the last 35 years largely due to rising levels of atmospheric carbon dioxide.

Other research documents increased crop yields under high carbon dioxide concentration, making food more abundant and affordable. With climate enemies like this, who needs friends?

On top of all of this, these models calculate the SCC based on the above-mentioned projections for three hundred years into the future. Yet who knows what energy technologies we’ll be using 100 years from now? Could anyone in 1918 have predicted today’s technologies? People really have very little idea how their economic decisions made today will affect their situation three years from now, let alone thirty or three hundred.

Realism Necessary

The idea that any economist can predict the quantitative effect of an action today on the economy three hundred years from now would be laughable if not taken so seriously by politicians seeking excuses for policies to which they’re already committed on other grounds.

Wouldn’t it be nice if we could scientifically determine the cumulative costs or benefits that result over the next three hundred years from our choices in the present? It may be nice, but it is impossible. Because these models produced such wildly different results depending on the projections and assumptions baked in the mathematical cake, economist Robert Pindyck concluded after an extensive review of such models that they are so badly flawed as to make them virtually useless for policy.

Yet various environmentalists urge the EPA to use them anyway. Because of their grave, if not fatal, weaknesses we should be very circumspect indeed and beware relying on them to justify policies that impoverish the least developed societies for the sake of who knows what.

————

Shawn Ritenour, Ph.D., is Professor of Economics at Grove City College and a Fellow of The Cornwall Alliance for the Stewardship of Creation.

5 Comments


  1. Richard Sigman  

    Great piece. Kevin and David have indeed done some amazing work over there at The Heritage Foundation

    Reply

  2. Mark Krebs  

    Thanks for this very useful contribution. I have some questions however.

    What would an appropriate discount rate would be for predicting values for 300 years?

    Who would that discount rate represent?

    What I’m getting at is why should we be restricted by old OMB discount rates for commercial entities? Why not “implicit” discount rates that take in to account that reportedly “63% Of Americans Don’t Have Enough Savings To Cover A $500 Emergency”

    (https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-americans-dont-have-enough-savings-to-cover-a-500-emergency/#7498cbf84e0d).

    Would a 99 percent “implicit” discount rate be fair?

    Shouldn’t we at least model such rates?

    Reply

    • Shawn Ritenour  

      Mark,

      You raise an excellent question. I really don’t know what a good rate of discount would be, especially over three hundred years. Discount rates are, like all economic prices and price ratios, determined by subjective preferences. Any rate chosen is pretty arbitrary. I am very doubtful that we can get any meaningful information from attempting to discount the future costs at a constant rate for three hundred years. At the same time, people do discount the future at some rate–some people at a much higher rate than others. For some 99% may be more accurate or not high enough.

      Best wishes,

      Shawn Ritenour

      Reply

  3. E. Calvin Beisner  

    And every point higher pushes the SCC lower.

    Reply

  4. Beware EPA ‘Social Cost of Carbon’ Models  

    […] This article was originally published on MasterResource.com. […]

    Reply

Leave a Reply